Light at the End of the Tunnel for Banks?

CNBC.com

Tuesday, 1 Apr 2008 | 11:34 AM ETCNBC.com

SHARES

News of massive writedowns at two major European banks paradoxically sent shares soaring Tuesday, as many investors took the typically negative announcements as a signal to buy into the battered sector.

Shares in Swiss bank UBS surged more than 6 percent despite the fact that it announced $19 billion in writedowns, while the European banking sector was 3 percent up.

UBS also said it would raise around $15 billion by a rights issue, which was fully underwritten by a syndicate of banks led by JP Morgan , Morgan Stanley , BNP Paribas and Goldman Sachs .

“We’re taking comfort from the fact that four banks are actually willing to support UBS,” Ralph Silva, research director at TowerGroup, told “Worldwide Exchange.”

“I think the buying opportunities are certainly here,” Silva said, adding that the low point in the financial sector is only two weeks away, when UBS are due to deliver their final report.

Video: Watch entire Silva interview (4 mins, 53 secs)

Shares in German Deutsche Bank also rose more than 3 percent after it said it would write down 2.5 billion euros ($3.9 billion) in the first quarter on the value of loans it has committed to, as well as other investments.

Liquidity Boost

The sector's revival was also aided by signs that U.S. Treasury Secretary Hank Paulson and central bankers are considering radical strategies to boost liquidity.

Banks are hoarding cash in case they need it and as concern lingers about counterparty risk, which has driven up the cost for all banks and corporates of borrowing funds.

"More significant (than UBS) is the anticipation that Paulson is going to lead a global concerted effort to free up the credit crunch," Simon Maughan, analyst at MF Global, told Reuters.

"For a long time we've been worried about moral hazard ... we're now past that point, what we're trying to do now is save the banking system, and the price that banks will pay is tougher regulation going forward."

But even though the temptation to ‘bottom-fish’ financial stocks may be growing as share prices remain near multi-year lows, Greg Smith, managing director UK at Fat Prophets, told “Squawk Box Europe” that investors shouldn’t even look into buying banks until the start of next year.

The current turmoil in the banking sector is far from over, Martin Hennecke, Senior Manager, Private Clients from Tyche, also said, adding “the worst is yet to come.”

Investors unwilling to risk holding banks should stick with commodities and diversified miners, according to Smith.

Gold and defensive stocks such as telecoms and pharmaceuticals are also a good bet against further falls in the banking sector, Smith told CNBC, adding that selectivity was the key in troubled stock markets.